Ed Sullivan, Chief Economist PCA Cement Outlook: 2009-2013 Ed Sullivan, Chief Economist PCA TRACES Workshop 2009

Introduction: Overview Economic fundamentals are weak. Private Sector no longer drives demand Residential & Nonresidential recoveries are not expected to materialize anytime soon. Outlook shaped by policy actions.

Portland Cement Consumption Thousand Metric Tons - 45MMT =

Capacity Expansion Thousand Metric Tons Stated Capacity Expansions Potential Increases From Specification Changes

Market Imbalances - Changes in Cement Consumption Tons + Capacity Expansion Tons = 1980-82 1990-91 2000-01 2007-2010 1973-74

Introduction: Conclusions Stimulus will provide some relief…. …but hardship facing the industry will not be avoided… Further plant actions may materialize in the context of market imbalances… And this hardship will endure through 2010

Introduction: Conclusions PCA near-term scenario suggests: Near term excess supply conditions Relatively low utilization rates, higher than desired inventory positions Favorable availability & cost conditions These conditions will likely persist for several more years Past peak consumption not reached until 2015. New capacity absorbsion The caveat…harsh new regulatory environment..2013-2014. Domestic capacity adjustments Synchronized world demand returns

Economic Outlook Introduction

Economic Adversity Abates Mid-2010 2006 2007 2008 2009 2010 Sub-Prime Energy Financial Crisis Labor Markets State Deficits

Lending Conditions Easing Begins Mid-2010

Lending Conditions Access to credit markets is the grease that makes the economic system work…. Hindrances to credit access …obstruct a meaningful economic recovery Home Sales hindered Commercial expansion hindered Consumer spending hindered Conditions are improving…but degree and timing may be exaggerated… Accounts for PCA’s slightly more pessimistic outlook compared to consensus of economists

Bankers Reporting Tighter Lending Standards: Commercial Percent Source: Federal Reserve Board

Bankers Reporting Tighter Lending Standards: Consumer Percent Consumer Loans: Yellow Source: Federal Reserve Board

Bank Charge-Offs versus Unemployment Rate - % Loans Charged-Off, % Unemployed 10

Sub-Prime Replaced By More Toxic Resets Hope Now Actions, Fannie, Freddie, Private All Soften Impacts

Lending Standards: Assessments PCA has moved back the timing on an significant easing in lending standards..until second half 2010. Modest improvement may materialize earlier. Foreclosures and bank write-offs probably higher than reflected in consensus forecasts.. This assessment plays a critical role in formulating the timing of the economic recovery… Depresses GDP growth projections, job creation, housing starts recovery, nonresidential recovery and darkens states’ deficit picture.

Labor

Initial Unemployment Insurance Claims Newly Jobless, Number of New Claims Estimated Range Consistent With Zero Job Losses

Job Recovery: Past Recessions - Change, Thousands of Jobs Current Recession

Stimulus Size: Expectations for Growth Stimulus Not a Silver Bullet…and..the untold Story on Expectations

“Stimulus Timeline Phase I Phase II Phase III 2011 2009 2010 Policy Tool Objective 2009 2010 2011 Job Saving Job Creating Tax Cuts, Entitlement Spending, State Aid Stabilize Economy, halt adverse momentum Phase I Shovel Ready Projects Job Creation Phase II Job Creation, Address Structural Economic Issues Long Term Investments Phase III

Stimulus: Job Creation Estimates Million Jobs Obama Economists PCA 2009-2010 2009-2010 Unemployment: 8.8% Unemployment: 7.0% Job Estimates have large impacts on Cement/Concrete recovery assessments.

Stimulus Overview Obama’s $789 billion plan may not be enough. Obama economists expect an additional 2.8 million jobs lost. And plan aimed at creating /saving 3.7 million jobs. PCA estimates that 8.5 million jobs may need to be created/saved. Stimulus plan required = $1.5 trillion (conservative) And….Obama Economists implied it….. Taxpayer pushback, politics prevented full initiation for now… Don’t be surprised if a second stimulus plan materializes. New Highway Bill may fit requirement ($400 Billion = PCA) Delayed passage dovetails with 10% unemployment and may fly under radar and taxpayer pushback

Economic Outlook

Economic Growth Outlook Percent Change, GDP Growth Rate

Single Family Recovery 2011 Residential Single Family Recovery 2011

Single Family Home Sales (New) - Thousands of Homes Weak Labor Markets, Tight Lending Standards, Competition From Distressed Properties Prevent A Meaningful New Home Sales Recovery From Materializing Until Mid 2010

Single Family Home Inventory - Number of Homes for Sales, Months Supply

Nonresidential The Crash of 2009

Source: PCA

Stimulus Good, Reauthorization May be Even Better Streets & Highway Stimulus Good, Reauthorization May be Even Better

Job Losses Generate Deficits –Pushing Discretionary Spending Down Discretionary State & Local Highway/Street Spending - Millions of Real $ (estimated) Job Losses Generate Deficits –Pushing Discretionary Spending Down State Discretionary Highway Spending Will Act as a Powerful Drag on Total Highway Construction Activity in 2009-2010

“Shovel Ready” Timeline Jan Feb March April May June July August House Bill Obama Inaugurated Job Creation May Come Later Than Many Expect Senate Passes & Bill Signed Federal Paperwork State Paperwork Bid Letting Bid Review Contractor Paperwork Construction Begins

Shovel Ready: Late in Coming, Low Cement Intensities Projects that can be undertaken within 120 days. Paint a bridge Versus new ramp for a bridge. Resurface a road Versus Expand a road Low cement intensities per $ spent. These programs will create jobs and cement volume increases...but not as many as “Hard” infrastructure investment. Panic to spend Versus Patience and Payoff

Streets & Highways Economic distress will lead to a drag in discretionary state highway spending initiatives Stimulus spending will help some in 2009…more in 2010.. Low cement intensities through first half of 2010….resurfacings and system preservation dominate… Backlog of projects related to systems preservation reduced…..

2004-2009 SAFETEA-LU: Composition of Work

2011-12 New Highway Bill: Composition of Work

Oil Price Scenario - $ Per Barrel, WTI (estimated) Synchronized World Growth: Characterized by Emerging Middle Class in Developing Economies

Announced New Coker Installations Cumulative: Thousands of Barrels Per Day

Parity Achieved in Fiscal 2009 Projected: Initial Bid Concrete Vs Asphalt Paving Costs Per Two Lane Road Mile - Urban Asphalt Concrete Parity Achieved in Fiscal 2009

Stimulus Payback in context of Global Recovery Beyond the Crisis Stimulus Payback in context of Global Recovery

Introduction: Overview Cyclical correction is temporary.

Point Six Stimulus spending must be paid for…resulting in higher interest rates, higher taxes and potentially higher inflation…. …and…American consumer..the engine of US economic growth may show significantly different spending patterns… …combining for the potential of slower longer term economic growth (50 basis points). …But even with these gains…past cyclical peaks are not expected to materialize until 2015.

Single Family Housing– United States 000 Starts Pent-Up Demand = Housing Peaked January 2006 2007: -29% 2008: -37% 2009: 0.0% 2010:+34% Interest Rates low, Decline in Home Price, Job Recovery Translate into Improved Affordability

Point Seven Once recovery is in place…. And despite payback costs for stimulus… Concrete construction could record large and sustained gains in growth.

Long-Term Outlook 2009-2030

US Population Thousands of Persons US Population Adds Roughly 65 Million People by 2030 …. a 22% Increase.

Cement Consumption: Long Term Million Metric Tons Growth in Context of Population Changes, Slower US Economic Growth, Strong Global Growth, Climate Change Legislation and the “Green” Revolution.

U.S. Supply Balance: No New Capacity Expansion Plans Million Metric Tons Cement Consumption Supply Gap: 67 MMT Cement Production

Closing the Supply Gap 67 MMT = 2030 Two Options: Foreign Source: 40-45 MMT Import Capacity Domestic Source: 30 Plants (2 MMT per Plant)

U.S. Supply Balance: EPA Mercury Impacts Million Metric Tons Cement Consumption Imports: 41.8 MMT Cement Production EPA: Hg Impact

Climate Change: Accelerated Decline of Wet Kilns Million Metric Tons

U.S. Supply Balance: Mercury & Climate Change Million Metric Tons Cement Consumption Imports:59 MMT Cement Production

Before Settling On Import Sourcing Strategy… Before Settling On Import Sourcing Strategy…. - $ Per Barrel, WTI (estimated), Dry Bulk Freight Rates Synchronized World Growth: Characterized by Emerging Middle Class in Developing Economies

Closing the Supply Gap Consumption: 180 MMT = 2035 Demographics and Solutions to Energy/Climate Change Domestic Capacity: 112 MMT (No additional plans after current round) Potential Supply Gap: 68 MMT Regulation: Hg: Gap = -20 MMT of domestic capacity Climate Change = ?? Foreign Source: Terminal Capacity 40-45 MMT Capacity Build more terminals Freight Rates and Instability Domestic Source: 40 Plants! In context of harsh regulatory environment.

Ed Sullivan, Chief Economist PCA Cement Outlook: 2009-2013 Ed Sullivan, Chief Economist PCA TRACES Workshop 2009